What’s employee turnover costing you?

Written by: Officevibe & Sofia Acosta
Published on: February 23, 2023 |  Reading time: 13m

There was a time when employees commonly spent their entire careers at one company. While these days are long gone, organizations still strive to retain employees for the long run. And with good reason. Companies don’t want a revolving door of employees, and employees want to feel happy, fulfilled, and motivated in their jobs. When both sides have each other’s interests at heart, great things ensue.

When the opposite happens and issues in employee experience fester, employee turnover (especially voluntary turnover) rises. High employee turnover often stems from ineffective leadership, lack of career development opportunities, toxic work environments, dissatisfaction with annual salary, or a mix of it all. And when you’re blind to how employees really feel at work, it’s easy to lose sight of these factors and how to remedy them.

Once you realize the true cost of employee turnover, it’s hard to ignore. We’re here to break it down for you.

What is employee turnover and why does it matter?

Before we dive into the impact of employee turnover, let’s touch on what it means. Employee turnover looks at the changes in your company’s workforce during a given timeframe, particularly the number of employees who quit an organization (or are asked to leave), and are replaced by new employees.

The cost of employee turnover is significant, and we don’t just mean financially. While that is a major factor, it’s also costly on the human front: lower employee morale, lost productivity, and a negative impact on the employer brand. While a certain level of employee turnover is expected at every company, retaining top performers is key.

Star employees don’t up and quit out of nowhere. Learn how to spot signs and symptoms of disengagement, and what you can do to prevent your best people from leaving.

The real cost of employee turnover

The cost of employee turnover can be split in two main categories: hard and soft costs. Hard costs are the easier-to-measure costs that most people take into account when turnover is on the rise. Their impact is more overt and often felt sooner by the team. Soft costs, on the other hand, are largely unaccounted for or unnoticed until they lead to bigger issues. Let’s dig a bit deeper.

Hard costs of employee turnover

  • Offboarding costs mainly include the resources and time spent on administrative tasks, like updating HR files, conducting exit interviews, removing employee accesses, and collecting IT equipment. In rare cases, these costs can also include severance pay and even legal fees.
  • Hiring costs are the most obvious costs of high turnover. They include resources spent on job posting services and advertisement, applicant screening, interviews, and background checks.
  • Onboarding costs are similar to offboarding ones, as they encompass the administrative resources needed to set new employees up. This includes the prep and shipping of a new hire’s computer, and all the IT and HR support they’ll need in their first few weeks.
  • Training costs include the time senior employees spend teaching new hires the ropes, as well as resources associated with putting the trainings together. These are especially costly for technical positions where training timelines are longer and more rigorous.
  • Benefit costs can also rack up when turnover is on a hike. If your company offers employees competitive perks like tech and furniture budgets, for example, you can expect to spend more when an employee leaves.

Soft costs of employee turnover

  • Opportunity cost of employees’ time. Every cost mentioned above has the common denominator of time. Looking at the hard cost is simple. You take the hourly wage of the people involved in setting new hires up, and multiply that by the hours spent doing so. The soft cost is a bit harder to measure. It looks at the cost of what employees could be working on instead and the value you’re missing out on.
  • Lower employee morale.When a team member leaves, team dynamics are likely to shift and can make remaining employees feel uneasy and unmotivated.
  • Added stress. Hiring, onboarding, and training a new employee is a lengthy process. And to make sure productivity doesn’t dwindle too much, the rest of your team often takes on larger (usually unsustainable) workloads to compensate.
  • Lost productivity. An employee’s value appreciates with time. The longer they stay with your organization, the more autonomous and productive they are. It takes time, sometimes years, for new employees to make up for this lost productivity.
  • Lost knowledge. Similar to the point above, the longer a person works at your company, the more they know about your products, brand, processes, and more. And while some of this knowledge can be documented, it’s hard to replicate years of experience-based learnings.
  • Weakened employer brand. Losing employees — especially losing a lot of employees over a short amount of time — can be jarring for the rest of your team and can also deter potential new recruits. That’s because turnover is a great indicator of what it’s like to work at your company. The larger the number, the bigger the hit on your employer brand.
  • Decreased quality of work. It’s only normal for people to make mistakes, especially when they’re new on the job. And while a certain degree of error is accepted, quality control can become a bigger issue when employees are continuously replaced.
  • Lower customer satisfaction. When quality fumbles, those who usually pay the price are your customers. It’s also more difficult to nurture positive client relationships when your team is constantly changing.

While the exact cost of employee turnover is based on many factors, like those mentioned above, research by the SHRM estimates that each departure costs about a third of that employee’s annual salary. Of this cost, it’s estimated that 33% covers hard or direct costs, while the remaining 67% accounts for soft or indirect costs.

Some experts, like Edie Golberg, founder of Californian talent management company E.L. Goldberg & Associates and SHRM Chair, believe the cost of replacement can be as much as four times the departing employee’s salary.

Whether your personal cost of employee turnover is 30 or 300%, or anything in between, it’s not negligible and can really hurt your business’s success. But do not fret. We’re here to help you figure out where you stand and how you can drive your company forward by prioritizing its people first.

How to calculate and understand your employee turnover rate

Before putting a strategy into play, it’s important to learn how to calculate employee turnover and understand your turnover rate. Once you have that down, you can lay out the steps needed to improve your retention rate.

How to calculate your employee turnover rate

It’s actually quite simple, so get your calculators out and follow these four steps:

Step 1: Add the number of employees at the start of the year with the number of employees at the end of the year. For example: 20 employees at the start of the year + 18 employees at the end of the year = 38 employees.

Step 2: Divide the total you got from step one in half (by 2). For example: 38 total employees ÷ 2 = 19 employees.

Step 3: Divide the number of employees who left during the year by the outcome of the first equation. For example: 2 employees left during the year ÷ 19 employees = 0.105

Step 4: Multiply this final number by 100 to get your employee turnover rate. For example: 0.105 × 100 = 10.5% turnover rate.

Voluntary turnover in particular speaks volumes about employee satisfaction and employee engagement. When employees quit by choice, it’s often because there hasn’t been enough prevention. A recent Gallup analysis revealed that 52% of voluntarily exiting employees say their manager or organization could have done something to prevent them from leaving their job.

Let’s take a look at the employee retention strategies that are most effective in helping to reduce employee turnover.

How to reduce employee turnover: Proven retention strategies

In order to put together a solid employee retention strategy, we first have to understand the main reasons why employees decide to leave their company. While there are many possible reasons to quit and find employment elsewhere, these are some of the most common ones:

  • Lack of career advancement opportunities
  • Not enough flexibility or work-life balance
  • Lack of feedback and recognition
  • Poor management (or a bad manager, in particular)
  • Feeling disrespected at work
  • Toxic company culture
  • Low salary (and finding higher pay elsewhere)
  • Not allowing remote work
  • Burnout

Luckily, there are several ways to address these reasons and improve employee engagement and retention, ultimately reducing employee turnover:

1. Make people feel valued

There’s tremendous value in recognizing great work. Every employee deserves to feel appreciated and acknowledged for their efforts and contributions to the organization, so regular recognition should always be part of the plan, and even made a priority. When employees feel valued, they also feel more engaged, motivated, and more likely to perform.

Recognition at work benefits everyone — both the employee and the company. In fact, SHRM survey findings show that 68% of HR professionals believe recognition programs positively impact retention, and 56% say it also facilitates recruitment.

Make every person feel appreciated in your organization with these 5 steps to create a culture of recognition at work.

2. Create a feedback loop

Much like employee recognition, a continuous feedback loop is another powerful tool in keeping employees, well, in the loop. We’re talking collecting opinions, suggestions, and comments from employees on a regular basis. Tap into their insights, get people on the same page, and most importantly, enhance engagement.

Two-way communication is king, and feedback is important on both sides. Giving and receiving feedback helps keep the momentum going, gets everyone involved, and acknowledges the value that everyone brings to the table. It can also help build team spirit. When team members continuously give each other feedback, it gives everyone the opportunity to learn and improve.

Creating a feedback loop can feel like a real head-scratcher if you don’t know where to start. Luckily, these 10 tips can make giving and receiving feedback an effortless part of your company culture.

Officevibe research shows that a fifth of employees do not feel that the feedback they receive helps them grow in their role, so there’s definitely room for improvement. Remember that engagement and employee development help reduce turnover — which leads to our next point.

3. Keep professional development top-of-mind

In order to not feel stuck or stagnated in a role, employees need to have the opportunity to grow. Career development helps them build and work towards professional goals, but getting there isn’t a solo mission. It’s up to the organization to create opportunities to learn and develop new skills, and mentorship can have a real positive impact.

1 in 4 employees feel they do not have the opportunity to grow within their organization.

Officevibe Pulse Survey data

Having a workplace mentor can help give employees a more solid direction in which to go. Employee development can strengthen engagement, which has a direct impact on employee retention, helping to reduce employee turnover.

Need to check in with your employees on professional development? Use our template to start a conversation about career development in your next one-on-one meeting.

4. Prioritize work-life balance

The shift in the professional landscape over the past couple of years has seen greater focus get put back on healthy work-life balance. Priorities have changed, and the importance of mental and physical health is being acknowledged more than ever. Neglecting these not only affects the health of the employee, but also the health of the organization.

An employee struggling with a lack of balance or high levels of stress is more likely to become disengaged, make mistakes, miss work, or even quit their job. Employees with great work-life balance are usually happy employees, and happy employees are 12% more productive.

Aside from simply observing your team, you can assess your team’s stress levels with a quick, anonymous survey. The results you collect will help you tackle the root of the problem and get your team back on track in no time.

5. Nail the onboarding process

While it may not be the first strategy that comes to mind, companies should really think about retention from the start. That includes creating a lasting first impression with a great onboarding process.

Why is this so important? The onboarding process gives employees a glimpse into the company culture and shapes their perception of their new workplace. A good first impression impacts their desire to stay, while a negative impression can lead to turnover even sooner.

Tools like Softstart can help companies structure, automate, and measure the onboarding process. It helps new employees understand the company, get a taste of the culture, train for their new role, find documents, install their tools, meet their teammates, and so much more, creating a stellar onboarding that engages new hires from day one.

6. Compensate your team with fair pay and benefits

It’s no surprise that a higher annual salary (or better pay for hourly employees), benefits, time off, and other forms of compensation are motivating factors to stay at a company.

In a competitive labor market, keeping up with the market rate and compensating employees fairly is especially important. If you don’t pay your employees well, they’ll find a company that will. The research confirms this: salary is still the top reason why people consider changing jobs. But while an employee’s salary is enough to make them leave, salary alone won’t make them stay. It’s crucial to complement fair compensation with other positive factors in the employee experience.

7. Conduct stay interviews regularly

There’s something to be said for staying a step ahead. Remaining proactive at all times is a great way to prevent employee turnover. We all know that when employees leave, you conduct exit interviews to better understand the reasons behind their departure. But rather than waiting until it gets to that point, having stay interviews with current employees is a great way to better understand what’s actually keeping them at your company.

When building your employee retention strategies, the insights and knowledge you gather from stay interviews can really help you tap into your employees’ needs.

Not sure where to start? Here are 6 stay interview questions that are sure to give you the insights you need to have your employees stick around for the long haul.

8. Pay close attention to your company culture

Last, but certainly not least, is creating and maintaining a positive company culture. Not only does it help you retain current employees, but it also plays a big role in attracting new ones.

Employees are more likely to enjoy their jobs and stay long-term if their environment is pleasant and constructive. And while workplace culture can’t be created, per se, a great culture can be fostered with the right care and mindset. Involving your team in the process is always a good idea, since they’re the ones that contribute to the vibes day-in-day-out. Encourage team bonding (even if it’s simply eating lunch together), try new engagement activities, and celebrate people’s milestones and achievements.

We’ve said it before: employee turnover lowers morale. So creating a workplace culture that promotes healthy relationships, great collaboration, and a little bit of fun can have a significant impact on business outcomes.

The distributed work reality has shifted what workplace culture means. Check out our latest magazine to learn more about human-generated culture in the world of remote-first work.

Succeed at employee retention

We now know that the cost of both involuntary and voluntary employee turnover is significant, so preventing it by implementing these proven retention strategies is key. Once you put them into play, you can observe their impact by regularly measuring employee retention rates. In essence, the steps to follow are to establish your benchmark, make the strategic changes, and track the results.

While implementing your employee retention strategy, be sure to make good use of employee engagement solutions like Officevibe that can help you boost employee engagement, offer meaningful recognition, and encourage sharing valuable feedback.

Here’s to creating a successful employee retention strategy!